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A Model and its Solution Method for a Two-Item Newsvendor Supply Chain with Return Policy and Demand Leakage

Author

Listed:
  • Che-Tsung Tung

    ()

  • Kuo-Hsien Wang

    ()

  • Yu-Je Lee

    ()

Abstract

We study a one-manufacturer and one-retailer type of supply chain that the manufacturer manufactures two newsvendor-type items and offers a buy-back contractual commitment to the retailer who sells the items in a stochastic demand market with various prices, allowing demand leakage from high-priced item to low-priced one. The objective of this study is to coordinate the chain by jointly determining wholesale prices, buy-back prices, retail prices and order sizes. We first derive a succinct model for the chain in which the manufacturers expected profit subject to the retailer’s optimal expected profit will be explored. And a solution method to the case of uniformly distributed error demand is subsequently proposed; accordingly, a series of examples along with graphical concavity and satisfying constraint of the manufacturer’s expected profit are conducted to validate our solution method.

Suggested Citation

  • Che-Tsung Tung & Kuo-Hsien Wang & Yu-Je Lee, 2014. "A Model and its Solution Method for a Two-Item Newsvendor Supply Chain with Return Policy and Demand Leakage," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(1), pages 397-408, January.
  • Handle: RePEc:hur:ijaraf:v:4:y:2014:i:1:p:397-408
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    References listed on IDEAS

    as
    1. Bose, Indranil & Anand, Paul, 2007. "On returns policies with exogenous price," European Journal of Operational Research, Elsevier, vol. 178(3), pages 782-788, May.
    2. Martin A. Lariviere & Evan L. Porteus, 2001. "Selling to the Newsvendor: An Analysis of Price-Only Contracts," Manufacturing & Service Operations Management, INFORMS, vol. 3(4), pages 293-305, May.
    3. Zhang, Michael & Bell, Peter C., 2007. "The effect of market segmentation with demand leakage between market segments on a firm's price and inventory decisions," European Journal of Operational Research, Elsevier, vol. 182(2), pages 738-754, October.
    4. Zhang, Michael & Bell, Peter C. & Cai, Gangshu (George) & Chen, Xiangfeng, 2010. "Optimal fences and joint price and inventory decisions in distinct markets with demand leakage," European Journal of Operational Research, Elsevier, vol. 204(3), pages 589-596, August.
    5. Yao, Z. & Leung, Stephen C.H. & Lai, K.K., 2008. "Analysis of the impact of price-sensitivity factors on the returns policy in coordinating supply chain," European Journal of Operational Research, Elsevier, vol. 187(1), pages 275-282, May.
    6. Lau, Hon-Shiang & Lau, Amy Hing-Ling, 1999. "Manufacturer's pricing strategy and return policy for a single-period commodity," European Journal of Operational Research, Elsevier, vol. 116(2), pages 291-304, July.
    7. Barry Alan Pasternack, 1985. "Optimal Pricing and Return Policies for Perishable Commodities," Marketing Science, INFORMS, vol. 4(2), pages 166-176.
    8. Serel, Dogan A., 2008. "Inventory and pricing decisions in a single-period problem involving risky supply," International Journal of Production Economics, Elsevier, vol. 116(1), pages 115-128, November.
    9. Andy A. Tsay, 1999. "The Quantity Flexibility Contract and Supplier-Customer Incentives," Management Science, INFORMS, vol. 45(10), pages 1339-1358, October.
    10. Arcelus, F.J. & Kumar, Satyendra & Srinivasan, G., 2008. "Evaluating manufacturer's buyback policies in a single-period two-echelon framework under price-dependent stochastic demand," Omega, Elsevier, vol. 36(5), pages 808-824, October.
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